On Wednesday 15th March 2023, Chancellor Jeremy Hunt delivered his Spring Budget, which included the biggest shake-up in the taxation of pensions for over a decade. The Lifetime Allowance is being abolished altogether and the standard Annual Allowance is being increased by 50%.
In simple terms, these changes will enable people to save more before they get hit with a tax charge.
What are the Lifetime and Annual Allowance?
The Lifetime Allowance sets the total value of all the pension savings (excluding State pensions) you can build up before having to pay tax. It currently stands at £1.073 million and had been expected to stay at that level until 2026, but from 6th April 2023 it’ll be a thing of the past.
The Annual Allowance limits the amount that can be paid into your pensions in a tax year without having to pay a tax charge. It’s being increased from £40,000 to £60,000, with changes to the tapered Annual Allowance also coming in on 6th April 2023.
There’s a third limit, the Money Purchase Annual Allowance, which limits how much you can pay into your defined contribution pension arrangements in a situation where you’ve already started taking some benefits from them. It’s going up from £4,000 to £10,000.
Sounds good…but will it affect you?
The Lifetime Allowance and Annual Allowance were only expected to be a factor for a minority of people. Most UK pension savers weren’t likely to hit the Lifetime Allowance and don’t typically use up their full Annual Allowance each year.
Part of the reason for the change is to discourage workers from retiring early simply to avoid additional tax charges. NHS doctors are a widely publicised example. Many reports suggest doctors are retiring or reducing their hours purely because of the impact the current Lifetime Allowance and Annual Allowance has on their tax situation. The changes are intended to encourage people to stay in work longer, which should benefit our economy and public services.
The changes are therefore good news for you if you’ve got substantial pension savings and you’re concerned that, in time, you could exceed the Lifetime Allowance. You’ll no longer need to worry that you may have to pay an additional tax charge when you retire.
The amount of tax free cash lump sum available at retirement is being frozen at the current limit of up to 25% of the 2022/2023 Lifetime Allowance.
They’re also good news if you’re looking to boost your pension savings, either by increasing how much you regularly save or by making any one-off payments into your pension. The increased Annual Allowance will enable you to put more into your pension without a tax penalty.
The Finance Bill to bring these changes into law is expected to be published on 23 March 2023.
What about the State Pension?
Every year the State Pension is reviewed to take account of inflation, and new figures are announced. From April 2023, payments will be:
- £203.85 a week (up from £185.15) for the full, new flat-rate State Pension (for those who reached State Pension age after 5th April 2016)
- £156.20 a week (up from £141.85) for the full, old Basic State Pension (for those who reached State Pension age before 6th April 2016)
As ever, if you’re making decisions about your financial future, we recommend getting independent help and advice. MoneyHelper is an excellent place to start. It can also help you to find an authorised independent financial adviser (IFA) in your area.